In re Etoys, Inc., No. 01-706 (MFW).

CourtU.S. Bankruptcy Court — District of Delaware
Writing for the CourtMary F. Walrath
Citation331 B.R. 176
PartiesIn re ETOYS, INC., et al., Debtors.
Decision Date04 October 2005
Docket NumberNo. 01-707 (MFW).,No. 01-708 (MFW).,No. 01-709 (MFW).,No. 01-706 (MFW).
331 B.R. 176
In re ETOYS, INC., et al., Debtors.
No. 01-706 (MFW).
No. 01-707 (MFW).
No. 01-708 (MFW).
No. 01-709 (MFW).
United States Bankruptcy Court, D. Delaware.
October 4, 2005.

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Mark Minuti, Esquire, Saul Ewing LLP, Wilmington, DE, G. David Dean, Esquire, Saul Ewing LLP, Baltimore, MD, for Barry Gold.

Frederick Rosner, Esquire, Jaspan Schlesinger Hoffman LLP, Wilmington, DE, for the Committee.

James L. Garrity, Jr., Esquire, Shearman & Sterling LLP, New York, NY, Ronald R. Sussman, Esquire, Kronish Lieb Weiner & Hellman LLP, New York, NY, for Traub, Bonacquist & Fox LLP.

John J. Rapisardi, Esquire, Weil, Gotshal & Manges LLP, New York, NY, for Goldman Sachs & Co.

OPINION1

MARY F. WALRATH, Bankruptcy Judge.


Before the Court are Motions filed by a shareholder, Robert Alber ("Alber"), and an administrative claimant, Collateral Logistics, Inc. ("CLI"), against Barry Gold ("Gold"), Morris Nichols, Arsht & Tunnell ("MNAT") and Traub, Bonaquist, Fox LLP ("TBF") and certain of their partners

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(collectively "the Respondents") seeking removal, disgorgement of fees, and sanctions for contravening the disclosure requirements of Bankruptcy Rule 2014 and the conflict of interest prohibitions of section 327(a) of the Bankruptcy Code. The Movants also ask the Court to refer the matter for criminal and disciplinary investigations. The Respondents oppose the Motions. The United States Trustee (the "UST") initially filed a Motion seeking disgorgement of fees from TBF but now seeks approval of a settlement of that Motion. A Motion seeking approval of a settlement with Goldman Sachs & Co. ("Goldman") is also pending. For the reasons set forth below, the Court will strike the CLI Motion, grant the Alber Motion as to MNAT in part, and approve the TBF and Goldman settlements. The Court will deny Alber's Motion as to Gold, but articulates herein a new requirement that officers of a debtor must in the future disclose any connections they have with other parties in the case which create a potential or actual conflict of interest.

I. BACKGROUND

On March 7, 2001 ("the Petition Date"), eToys, Inc., and certain of its affiliates (collectively "the Debtors") filed voluntary petitions for relief under chapter 11 of the Bankruptcy Code. The Debtors were electronic retailers of toys and other children's products.

On April 5, 2001, the Debtors filed applications to retain two firms as their bankruptcy attorneys: Irell & Manella ("Irell") and MNAT. The UST objected to Irell's retention arguing that Irell was not disinterested under section 327(a) because Peter Juzwiak, the Debtors' Vice President and General Counsel, was to join the firm as a partner effective April 30, 2001. As a result, Irell was retained as special counsel only.

In connection with the MNAT retention application, partner Robert Dehney ("Dehney") submitted an affidavit listing parties in interest in the case that the firm had represented within the previous three years or was representing at the time. (None of the other representations were on matters related to the Debtors.) The Dehney Affidavit failed to disclose that, at that time, MNAT was representing General Electric Capital Corporation ("GECC") and two affiliates of Goldman ("the Goldman Affiliates") in the bankruptcy case filed by Finova Capital Corporation ("Finova") on the same day that the Debtors filed their case. No objections were filed to the MNAT application and, as a result, the Court approved MNAT's retention on April 25, 2001.

On March 16, 2001, the UST appointed the Official Committee of Unsecured Creditors ("the Committee"). The Committee retained TBF as its counsel, which was approved by the Court on April 25, 2001. On May 21, 2001, the Debtors hired Gold to coordinate their liquidation. On July 23, 2001, after the Debtors had obtained D & O insurance, Gold was named President and CEO. At no time did Gold or TBF disclose that Gold and TBF's senior partner, Paul Traub, were partners in an entity known as Asset Disposition Advisors, LLC ("ADA") or that, TBF paid Gold $30,000 a month from February to May 2001 for his services to ADA.

On November 1, 2002, the Court confirmed the Debtors' First Amended Consolidated Liquidating Plan of Reorganization ("the Plan"), which went effective on November 5, 2002. Pursuant to the Plan, the Debtors' remaining assets were vested in EBCI, Inc. (the "Reorganized Debtor"), which was to be managed by a Plan Administrator. Gold was appointed as the Plan Administrator and retained MNAT as counsel for the Reorganized Debtor. The

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Committee was dissolved and succeeded by the Post Effective Date Committee (the "PEDC"). The liquidation of the Reorganized Debtors' assets is close to conclusion. The secured and priority creditors have largely been paid in full and unsecured creditors are expected to receive a distribution of approximately 16%. Shareholders will receive no distribution.

On November 24, 2004, the PEDC filed a Motion for approval of a settlement it had reached with Goldman for the return of $200,000 of a success fee which had been paid pre-petition by the Debtors. Alber and CLI filed objections to that Motion asserting that the attorneys and members of the PEDC had conflicts of interest.

On December 20, 2004, Alber filed an emergency Motion for sanctions and related relief against Gold, TBF and certain of its partners. On December 22, 2004, CLI filed a similar Motion. On January 25, 2005, Alber filed a Motion against MNAT purportedly on behalf of himself and other shareholders which also seeks disqualification and disgorgement of fees. Objections were filed by the Respondents.

On February 15, 2005, the UST filed its own Motion which sought disgorgement of fees from TBF (the "Disgorgement Motion"). The Disgorgement Motion was subsequently settled and a Motion to approve the settlement was filed on February 24, 2005 (the "Settlement Motion"). Alber and CLI filed pleadings in support of the Disgorgement Motion and in opposition to the Settlement Motion.

A hearing on all the Motions was held on March 1, 2005, at which evidence and testimony were presented in support of the parties' positions. At the conclusion, the Court permitted additional briefing by the parties to explain their positions based on the facts that had been presented.2 That briefing is complete and the issues are now ripe for decision.

II. JURISDICTION

This Court has jurisdiction pursuant to 28 U.S.C. §§ 1334 & 157(b)(2)(A), (B) & (O).

III. DISCUSSION

Alber alleges that the Respondents violated Bankruptcy Rule 2014 and section 327(a) of the Bankruptcy Code by not disclosing connections to other parties in the case, some of which he asserts are actual conflicts of interest. Alber contends that the delayed disclosure was intentional and that even the subsequent disclosure of the relationships failed to comply with the requirements of the Rule. Finally, Alber suggests that the Respondents violated Bankruptcy Rule 2016, Rule 11 and various provisions of title 18. Alber asks the Court to: (1) compel the Respondents to disgorge all payments that they have received to date in the case; (2) dismiss MNAT and TBF as counsel to the Reorganized Debtor and the PEDC, respectively; (3) permit Alber to conduct far-ranging discovery of the Reorganized Debtor and counsels' records; (4) appoint a trustee; and (5) refer the entire matter for additional criminal and disciplinary investigations into the conduct of the case.

A. Preliminary Arguments

The Respondents raise preliminary arguments that the Court is precluded from even addressing the merits of the Motions.

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1. CLI Motion

At the hearing it was asserted that the Motion filed by CLI was procedurally improper because it was filed by a corporation without benefit of an attorney. The Court agreed and ruled that CLI, as a corporation, may not file pleadings or appear except through counsel. Rowland v. California Men's Colony, 506 U.S. 194, 202, 113 S.Ct. 716, 121 L.Ed.2d 656 (1993) ("It has been the law for the better part of two centuries ... that a corporation may appear in the federal courts only through licensed counsel."). Therefore, the pleadings filed by CLI have not been considered.3

2. Jurisdiction over the PEDC and Reorganized Debtors

The Respondents also assert that the Court lacks jurisdiction over the PEDC, the Reorganized Debtor, and the Plan Administrator. Section 5.3(c)(v) of the Plan empowers the Plan Administrator to select, retain and compensate professionals without approval of the Court. Therefore, the Respondents assert that the Court does not have the power to remove TBF and MNAT from their post-confirmation employment as requested by Alber.

The Plan does, however, expressly provide that the Court retains jurisdiction to remove the Plan Administrator for cause. (See Plan at § 5.2.) See also Griffin Resorts, Inc. v. Price Waterhouse & Co. (In re Resorts Int'l, Inc.), 372 F.3d 154, 161 (3d Cir.2004) (holding that "Retention of jurisdiction provisions will be given effect, assuming there is bankruptcy court jurisdiction.")

Notwithstanding that retention language, however, the post-confirmation jurisdiction of the Bankruptcy Court is extremely limited. See, e.g., Resorts Int'l, 372 F.3d at 161 (concluding that, notwithstanding retention of jurisdiction provisions in a plan, "neither the bankruptcy court nor the parties can write their own jurisdictional ticket. Subject matter jurisdiction `cannot be conferred by consent' of the parties.... Where a court lacks subject matter jurisdiction over a dispute, the parties cannot create it by agreement even in a plan of reorganization.") (citations omitted); Walnut Assocs. v. Saidel, 164 B.R. 487, 491-92 (E.D.Pa.1994) ("Although the jurisdiction of the...

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38 practice notes
  • In re Sanchez, Bankruptcy No. 02-45416.
    • United States
    • United States Bankruptcy Courts. Fifth Circuit. U.S. Bankruptcy Court — Southern District of Texas
    • July 24, 2007
    ...Dec. 29, 2006) ("[T]he broad policy of the Bankruptcy Code ... favors transparency and disclosure whenever possible."); In re eToys, Inc. 331 B.R. 176, 187 (Bankr. D.Del.2005) ("Disclosure `goes to the heart of the integrity of the bankruptcy system.'") (citing In re B.E.S. Concrete Product......
  • In re Compact Disc Minimum Advertised Price, MDL No. 1361.
    • United States
    • United States District Courts. 1st Circuit. United States District Court (Maine)
    • October 2, 2006
    ...office of the United States trustee"). Pearson v. First N.H. Mortgage Corp., 200 F.3d 30, 38 (1st Cir.1999); see also In re Toys, Inc., 331 B.R. 176 (Bankr.D.Del.2005); In re R & R Assoc. of Hampton, 248 B.R. 1 (Bankr. D.N.H.2000). Deep has not asserted that the Lawyers ran afoul of this st......
  • In re Inc., No. 08–12229 (MFW).
    • United States
    • U.S. Bankruptcy Court — District of Delaware
    • January 7, 2011
    ...4642046 (Bankr.D.Del. Nov.4, 2010) (disqualifying counsel for creditors' committee because of improper solicitation); In re eToys, Inc., 331 B.R. 176, 194 (Bankr.D.Del.2005) (disallowing fees of counsel for debtors and committee because they had undisclosed conflicts of interest). Further, ......
  • In re South Canaan Cellular Investments, Inc., No. 09-10473bf
    • United States
    • United States Bankruptcy Courts. Third Circuit. U.S. Bankruptcy Court — Eastern District of Pennsylvania
    • March 25, 2010
    ...Western Mining & Investments, LLC. v. Bankers Trust Co., 2003 WL 503403, at *3 (D.Del.2003); see also In re eToys, Inc., 331 B.R. 176, 187 The confirmation order will make clear that the exculpation provisions apply only to postpetition conduct. Finally, LTI objects to the inclusion of the ......
  • Request a trial to view additional results
38 cases
  • In re Sanchez, Bankruptcy No. 02-45416.
    • United States
    • United States Bankruptcy Courts. Fifth Circuit. U.S. Bankruptcy Court — Southern District of Texas
    • July 24, 2007
    ...Dec. 29, 2006) ("[T]he broad policy of the Bankruptcy Code ... favors transparency and disclosure whenever possible."); In re eToys, Inc. 331 B.R. 176, 187 (Bankr. D.Del.2005) ("Disclosure `goes to the heart of the integrity of the bankruptcy system.'") (citing In re B.E.S. Concrete Product......
  • In re Compact Disc Minimum Advertised Price, MDL No. 1361.
    • United States
    • United States District Courts. 1st Circuit. United States District Court (Maine)
    • October 2, 2006
    ...office of the United States trustee"). Pearson v. First N.H. Mortgage Corp., 200 F.3d 30, 38 (1st Cir.1999); see also In re Toys, Inc., 331 B.R. 176 (Bankr.D.Del.2005); In re R & R Assoc. of Hampton, 248 B.R. 1 (Bankr. D.N.H.2000). Deep has not asserted that the Lawyers ran afoul of this st......
  • In re Inc., No. 08–12229 (MFW).
    • United States
    • U.S. Bankruptcy Court — District of Delaware
    • January 7, 2011
    ...4642046 (Bankr.D.Del. Nov.4, 2010) (disqualifying counsel for creditors' committee because of improper solicitation); In re eToys, Inc., 331 B.R. 176, 194 (Bankr.D.Del.2005) (disallowing fees of counsel for debtors and committee because they had undisclosed conflicts of interest). Further, ......
  • In re South Canaan Cellular Investments, Inc., No. 09-10473bf
    • United States
    • United States Bankruptcy Courts. Third Circuit. U.S. Bankruptcy Court — Eastern District of Pennsylvania
    • March 25, 2010
    ...Western Mining & Investments, LLC. v. Bankers Trust Co., 2003 WL 503403, at *3 (D.Del.2003); see also In re eToys, Inc., 331 B.R. 176, 187 The confirmation order will make clear that the exculpation provisions apply only to postpetition conduct. Finally, LTI objects to the inclusion of the ......
  • Request a trial to view additional results

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